10 Ways to Maximize Accounts Receivable Collections

10 ways to Speed Up your Accounts Receivable Collections
10 ways to Speed Up your Accounts Receivable Collections

Contrary to popular belief, cash crunches are not always a result of a business growing too fast. It is often due to customers paying too slowly. As your company grows, it is easy to get sales locked up in your Accounts Receivables (AR). For example, if your business is sending $50,000 worth of invoices each month, and your customers take an average of two months to pay their bills, you would have as much as $100,000 tied up in unpaid invoices at any given time. The situation might get worse when businesses often extend credit beyond the agreed time limit.

The amount tied up in unpaid Accounts Receivables might end up as a significant amount over time and freeing this up might provide your business with cash flow that can be diverted into crucial business functions. This can be done by speeding up the collection of your accounts receivable.

It is imperative to understand that speedy and timely collection of Accounts Receivables is important in any economic environment and that collecting Accounts Receivables in the most efficient manner is a company-wide effort, rather than just the work of the Accounts Receivable department. Stakeholders from all departments including sales, management and marketing, should contribute to devising a comprehensive collections strategy. Below are some of the ways in which your accounts receivable (AR) collection can be made more effective. 

10 ways to maximize Accounts Receivable Collections

  1. Update Your Accounts Receivable Software:

    If your Accounts Receivable software is outdated, it might cause your whole Account Receivable process to slow down. Updated software can provide better insights into your collections process, aiding in quickening the collections of Accounts Receivables. Good software should help you track receivables by providing insights on the number of invoices sent out, number that have been viewed, the number of invoices paid and amount of invoices outstanding.

  2. Billing it Right:

    The best invoices would include all relevant information, including payment terms, quantity sold or hours billed if you are a service organization. Additionally, make sure invoices are accurate in terms of mailing address and contact information as wrong contact details would lead to delay in delivering the invoice, resulting in late payments. A clear invoice can help avoid the need for follow-up questions on items sold or services rendered, which can delay the payment process. It is also important to send put bills as soon as products or services are delivered. When bills are sent promptly, there are higher chances of the customer paying you within the stipulated time.

  3. Negotiate for Optimal Payment Terms:

    You could accelerate your collections process by negotiating the most favorable terms, which would satisfy your customers. In many industries, companies use net-30 as the payment terms. Nevertheless, if you could get customers to agree to net-15 or net-20, it can significantly increase your cash flows as the collection period gets s almost halved. It is important to note that being very strict on payment terms might not be a great idea. Actual wordings of the payment terms matter. Payment might get delayed if the words are impolite and the terms are unreasonable. For instance, terms such as ‘due on receipt’ or ‘due immediately’ might result in irate customers and late payments. Giving customers a little flexibility can go a long way in creating good will and speeding up payments. Another strategy is to offer discounts for early payment. For example, a ‘3-10, net-30’ discount provides customers a 3 percent discount if they pay within 10 days instead of 30. Consider the cost to company and whether it can be recouped before offering such discounts.

  4. Create Aging Reports:

    An aging report helps in placing clients under different payment categories. For example, clients can be divided into 0-30 days, 30-60 days, 60 days+). This can tell you at a glance which customers are late in their payments, the amount owed by them and the days that have past since the due date. Aging not only gives you an insight into how long accounts are overdue but also into the amount of AR outstanding. This information would help you focus your collection efforts where they are required. For instance, when you bill the customer on the first of the month, an aging report will accurately show that the account is 30 days old when a month is over.

  5. Consider Changing Payment Terms:

    It might happen that some of your best customers are having cash flow problems of their own. In these situations, you might consider changing the payment terms so that you retain the customer and at the same time, you keep receiving funds from them. For instance, you can create a phased plan wherein you receive 30% within 30 days, 30% in 60 days and total overdue within 90 days. It is best not to extend credit beyond 90 days unless it is a very special circumstance. Such payment terms should be in writing and must specify exactly how much will be paid over how many months, and at what interest rate (if any) until the invoice is fully collected. Both your company and the customer should sign the agreement. It is best to ensure that the customer does not make substantial purchases under these terms and payment terms for future purchases must be monitored.

  6. Ensure Adherence of Payment Terms:

    It is not just enough that you negotiate favorable payment terms; you must also enforce them on time. Unfortunately, many companies fail to ensure that customers adhere to the terms of payment. Customers are often allowed to pay well past the due date. Polite and constant reminders must be sent out to customers a couple of days before the payment is due. For example, if your terms are net-30, you should be contacting customers at least by the 25th to ensure that they pay on time. Additionally, adding words like ‘ignore, if already paid’ can help. Remember that not receiving the payment even past the due date would imply that you have given them an interest-free loan. If late payments are a big concern, you can consider charging interest on late payments.

  7. Use All Means of Communication:

    If customers do not respond to courtesy emails and letters, try calling them up for informing them of the delinquent status of their account. It is important to be polite and non-threatening. Ensure that the customer is given the benefit of the doubt, at least during your first call to them. You could increase the firmness of your tone and stress the seriousness of the situation as you make repeat calls. Consider other means of communication such as fax, SMS, and IVR reminders.

  8. Make a Collections Plan:

    It is important to create a plan for your collections process. Ensure that specific people are assigned to process so that others can concentrate on day-to-day activities. List down procedures for the process and make it known to the personnel responsible. For instance, you could ask them to call customers 7-10 days prior to the due date to ensure the products or services have been received along with the invoice and that there are no disputes. The customers can also be asked when they plan to pay. Calls can be made within 4 days of the payment due date when the payment is not received. Commitments should be obtained from customers on payment. When personnel stick to the plan, you can ensure that customers are contacted at the right time always.

  9. Record Interactions:

    Always record the promises and commitments made by the customer, including the date they said they would make the payment and the mode of payment. This way the next time you contact them you can remind them of their commitment. For example, if the customer had said they would pay on 28th, you could say “when we spoke last time, you promised payment by Friday, April 28th”. This would put pressure on the customer to pay.

  10. Consider Hiring Help:

    If you believe that the above methods would take up resources, you could consider hiring a collection agency to do the job for you. It has been often found that when companies use internal personnel for collections, clients make excessive excuses or try other evasive techniques for avoiding payments. A collection agent can help quicken the process by using effective ways to collect payments. However, this should be employed only after enough thought as there are chances of damage to the relationship between you and your customers. You could consider using this method for repeat defaulters or frequent late payers.

It is a known fact that by stepping up your Accounts Receivable collection process, you could improve your cash flow by converting sales to revenues quickly. If you believe that this would take a lot of effort, you could consider outsourcing the process to an expert Accounts Receivable BPO service provider so that your cash flow goals can be met.

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For information on how Invensis Technologies will deliver value to your business through Finance and Accounting Outsourcing Services, please contact our team on US +1-302-261-9036; UK +44-203-411-0183; AUS +61-3-8820-5183; IND +91-80-4115-5233; or write to us at sales {at} invensis {dot} net.


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